The Green Sheet Online Edition

August 23, 2010 • Issue 10:08:02

Legislative fallout for gift card providers

By Thom Aldredge
World Gift Card

Congress and the federal regulating agencies have established that we, as a nation, are under attack from card program providers, processors, acquirers, merchant banks, ISOs and anyone else that charges fees for providing credit, debit and prepaid card services.

After much deliberation, our elected officials, in sweeping reform aimed at eliminating the excesses of lending institutions, investment banks, brokerage houses and investment advisors have also taken a swipe (pun intended) at the payments industry. In a classic case of guilt by association, gift card providers got slapped as well.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the Credit CARD Act) and The Restoring American Financial Stability Act of 2010 (also called the Dodd-Frank Wall Street Reform and Consumer Protection Act) will apparently protect us from unscrupulous issuers and merchant service providers. In the following section, Daveed A. Schwartz, an attorney at Bullivant Houser Bailey PC, outlines the essential aspects of the CARD Act as it relates to gift cards, the section referred to as Regulation E.

What's covered?

Closed-loop, private-label and open-loop, network-branded gift cards are covered. What's not? Prepaid phone cards; reloadable cards not marked as gift cards; loyalty cards; cards not marketed to the general public; cards issued in paper form only; and admission certificates. Who is responsible? Just about anyone and everyone involved in the gift card industry.

What are the restrictions and prohibitions?

• Expiration dates: Must be at least five years from the date of issuance or last load of funds, and the expiration must be clearly disclosed on the card prior to purchase. In addition, certain disclosures regarding differences in expirations must be made as well. Also, no fees can be charged to replace a gift card with a valid balance during the five-year period, but an issuer may cash out a card for a cardholder in lieu of replacing the card.

• Dormancy/service fees: These are prohibited unless:
  1. The card has had a minimum of one year of inactivity from its trigger date
  2. The fees are disclosed
  3. Only one fee is charged
  4. Other requirements of the Federal Reserve Board are met
• Fee disclosure requirements: The cards must clearly state:
  1. That a fee may be charged
  2. The amount of the fee
  3. How often the fee can be assessed
  4. That the fee can be an inactivity fee

  Disclosure must be made to the purchaser prior to purchase. Additional fee disclosures must also be made at the point of purchase and must refer consumers to toll-free phone numbers or websites that provide additional information.

The mandatory compliance date for all of the requirements of Regulation E had been Aug. 22, 2010, but an amendment covering gift cards issued prior to April 1, 2010, was passed by Congress, extending the compliance date to Jan. 31, 2011. The gift card provisions of the CARD Act preempt inconsistent state laws. State laws that offer better consumer protection than the CARD Act supersede it. The federal law addresses open-loop gift cards in a manner that most state laws do not. General use prepaid cards that are reloadable and not marketed or labeled as gift cards are excluded from coverage; these are generally considered prepaid cards for the unbanked, payroll cards, government benefits cards, etc.

The act of financial overhaul

Dodd-Frank focused more on the limitation of the fees charged on prepaid cards from an interchange/discount perspective. The Federal Reserve will provide the regulations governing the "reasonable and proportional to the cost" provision at a future date. Prepaid card programs were mainly exempted from the legislation. However, the so-called Durbin Amendment provided merchants relief to offer discounts to customers who choose to use alternative forms of payment, thereby affecting closed-loop gift card programs.

Given Daveed's assessment, it seems to me that the federal government, in its desire to "convince" the electorate that it is doing something about preventing future financial crises, has embarked on a path to demonstrate control. The conclusions of analysts of these laws notwithstanding, the effect on consumers who obtain, possess, use, don't use and give gift cards will be negligible. Let's examine the law.

Cards not covered by CARD

• Prepaid phone cards: The pervasive prepaid phone card market, with its unfathomable rates and fee structures, must have benefited from a good lobbying effort.

• Reloadable cards not marked as gifts: If the balance of a reloadable card not marked as a gift card is redeemed for dollars, how does this type of card gain exemption?

• Cards not marketed to the general public: If not to the general public, then to whom? Members? So if buying a card makes you a member, would it suffice that the card program is not marketed to the general public?

• Cards issued in paper form only: Cards can be printed on paper, with a mag stripe or barcode (prepaid phone cards would be a good example), yet they could have nondisclosed expiration dates and fees. Does it make any sense that cards printed in this fashion should be exempted?

Issues with expiry, dormancy

• Expiration dates: One perspective has always been that expiration dates have the effect of driving cardholders to the issuer's business location prior to the expiration, thereby increasing the velocity of customer adhesion. Our perspective has always been that the gift card program is designed to bring customers to the issuer's place of business regardless of when that happens. An expiration date on a gift card is biased toward a negative outcome. Expiration dates give the cardholder a reason not to stop by, even if it is 10 years from now. There shouldn't be expiration dates; the law is correct.

• Dormancy/inactivity fees: On the one hand, arbitrarily debiting fees and charges from the balance on an unused card cannot be fair in law or in equity to any cardholder, whether the cardholder paid for the balance or received the card as a gift from another. On the other, the merchant has a cost of maintaining the balance availability and usage data on the card in order to meet customer satisfaction needs, accounting concerns and government reporting obligations.

  There should be a balance between the two. In this instance the law is correct again in that reasonable and disclosed fees based on a cardholder's non-use of the card allows the merchant to effectively manage the card program to the benefit of all the cardholders.

About disclosure

We make cards for our customers. Our standard 2 1/8" x 3 3/8" card, subject to the mag stripe for the card number and a required 1/8" bleed edge, leaves less than four square inches in which to print a card number, maybe a small logo, sometimes a business name, address and phone number, and all of the disclaimer/limitation/legal language now and becoming necessary for proper disclosure. A five point font is as small as the text can be printed and meet the legibility standard. There just isn't much room to post the commandments. This might become a larger issue depending upon any additional disclosure requirements and a merchant's desire for an aesthetically pleasing card.

So, in summary, the CARD Act establishes the benchmark of how all closed- and open-loop gift cards are to be treated. It remains to be seen how this law will interact with state laws for gift cards that may be in conflict. The compliance date postponement until after the 2010 holiday season brought a great relief to merchants, issuers, program managers, card printers, etc. For more information about the CARD Act, go to www.federalreserve.gov.

My thanks to Daveed Schwartz for his information. Next, we'll finish this discussion and look at the application of closed-loop versus open-loop gift cards for a particular business.

Thom Aldredge is President of World Gift Card, a turnkey gift and loyalty card program provider based in Plano, Texas. He is a spokesperson for the gift card industry and serves on the Electronic Transactions Association Government Relations Committee. Call Thom at 888-745-4112 or e-mail him at thom@worldgiftcard.com.

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